Dec 5, 2023 | Change, Leadership
One of Charlie Mungers better known quips was: ‘All I want is to know where I am going to die, so I’ll never go there’. He avoided that place assiduously, but last week, after 99 years, Charlie went there.
Perhaps by mistake, perhaps because even he recognised it was time, a very long innings behind him. However, he leaves a mountain of wisdom accumulated over that extended period, most of it as ‘wingman’ to Warren Buffett. While it was a partnership with Buffett as Chairman and Charlie as Vice chairman, Buffett credited Charlie as being the brains behind the strategic insights and wisdom that made Berkshire Hathaway such a profit powerhouse.
So, what can a local SME, struggling for visibility, relevance, and cash in an increasingly homogeneous and competitive market where size really does matter, learn from him?
Simplicity. We humans tend to complicate things. It is not usually deliberate, rather it is a function of our limited perspectives, reliance on others, uncertainty, risk management, and a host of other drivers we all feel. Charlie advocated simplicity. Break a problem or situation down into its component parts, and deal with them one at a time. Others might call it managing by first principles. Einstein noted that things should be ‘made as simple as possible, no simpler.’
Over the weekend I was reading through the updated Australian building codes trying to understand the complexities of the recent changes. One of my clients must ensure the products he sells into the building trade not only comply, but he needs to explain to his builder customers the application of the codes to his products. The codes are so complex, differing across state jurisdictions, that builders who are bound by them often knowingly ignore them, relying on their suppliers. The codes are simply too complex for a small builder to ensure currency is maintained, amongst the other tasks necessary to keep their businesses nose above water.
Simplifying decision making processes by ensuring that the boundaries of authority, responsibility and accountability are clearly delineated through the business, is a goal to which we should all aspire.
Focus. Competing priorities means nothing gets optimised, and often many tasks do not get completed. Focussing attention on the things that really matter and giving them undivided attention for as long as the problem or opportunity warrants is a key lesson from Charlie.
Focussing also frees up our most valuable resource: time. By deliberately ignoring distractions, and leaving the lesser issues to others, or ignoring them completely, frees time to concentrate on the most important things, those that in the long term will deliver the greatest return.
No SME client I have ever worked with has been able to clear their desk sufficiently to devote the time and energy they should to the long term strategic foundations and health of their business. They simply wear too many hats, and often have difficulty delegating, assuming there is someone to whom they can delegate. The smaller the business, the harder it is, as those to whom delegation can be made, and the cash to pay for it, are in short supply.
The discipline required, both personal and in the business culture nurtured is enormously challenging.
Think and act for the long term. When you think and act short term you inevitably find yourself whipping around like the end of a bullwhip. Logistics managers understand the ‘Bullwhip effect’ better than most, as they see it every day in their supply chains. However, it is just as potent in the management of every other facet of a business. Seeing and responding primarily to the short-term fluctuations usually just compromises your ability to adjust strategically to the long term drivers of success.
Circle of competence. Many consultants have made a business out of advising clients to ‘stick to their knitting.’ It has been so prevalent it has become a management cliché. A circle of competence as Charlie saw it is a wider concept. While you are sticking to what you know, you are also seeing opportunities to leverage what you know in other domains.
This idea also applies to those stakeholders with whom you engage. By ensuring there is overlap in the circle of competence each brings to the table, you widen your own. This is at its core a strategy for successful collaboration.
Incentives. Understanding the power and application of incentives to shape behaviour enables individuals and groups to optimise the outcomes for which they are responsible.
For years we have seen research report after research report articulating the reality that after the basic needs of life, food, shelter, and companionship are satisfied, individuals start to respond to a range of other incentives. Some will sacrifice money for free time, others seek public acknowledgement of effort, security of what they have becomes more important than risking it for some possible future benefit. The list of drivers of individual behaviour goes on, and it is never just about money.
A friend who runs a successful bookkeeping business has recently gone to a four day working week. Several of her staff were against it, and subsequently left. The significant majority were happy to do their hours in four days, with Friday off. Productivity has jumped, as there is several hours each day when the phones are not ringing, causing distractions, so tasks are completed quicker, and with less processing errors. Contrary to the expectations of some, clients have also embraced the change, and remaining staff love having Fridays free to get on with their lives.
Understand probabilities. Success requires that we have a picture of what we believe the future will dish up, and we are able to respond today to put ourselves in a position to leverage those future events in our favour better than competitors. Given the only thing we know for sure about the future is that we will not be completely right about it, we need to understand probabilities. The better you can articulate the odds of some future state, the better able you will be to respond positively to it. Charlie was a great believer in what he called ‘Mental Models’. Being a voracious reader, he was able to see situations through a range of perspectives, and equate them to previous known outcomes, thereby giving him the opportunity to shorten the odds of an outcome he felt sufficiently confident to predict, and invest in to leverage.
Understanding your odds offers the opportunity to give yourself an appropriate margin for error for the investment you are contemplating. This applies equally to how you will spend your time today, to a major strategic choice.
Continuous learning. Charlie never stopped learning, until last week. Much of the time freed up by his focus and personal discipline was spent reading and interacting with those he considered smarter than him in some domain, and satisfying his voracious curiosity. Every situation he saw was considered as a learning opportunity, particularly those that did not go as predicted. They enabled him to add to his wardrobe of mental models with another model through which he could see a situation to understand better the odds, and shape them in his favour.
Every owner of an SME I have ever dealt with understands the implications of the phrase: ‘work on your business not in it.’ Few achieve what they would see as the optimum mix, and it is always the ‘on their business’ that suffers. They are depriving themselves of the opportunity to learn by looking around, compiling mental models, seeing opportunities in other domains, and leading their employees and stakeholders.
Rationality over emotion. Successfully doing all of the above allowed Charlie to make rational decisions, avoiding the attraction of the emotions. He has been the living embodiment of what Daniel Kahneman would call ‘System 2’ thinking. He takes his time, removes the pull of emotion, seeks out the facts, and makes rational choices for the long term.
None of the foregoing practises are stand alone triggers for success. Each influences the others in a range of ways, offering compounding benefits. In taking the long term view of his investment choices, Charlie allowed that most powerful force in the universe, (according to Einstein), compounding, to deliver for him. An investment of $100 and subsequent reinvestment of dividends in Berkshire Hathaway in 1978 when Charlie teamed up with Warren Buffet would be worth almost $400,000 today. This is an almost 20% annual compounding of value of the investment. It is 25 times the value today had that same $100 been invested in a S&P index fund. This is the effect of patience, long term thinking, and powerful mental models that increase the odds of success relative to other investment choices. Every owner and manager of an SME I have ever seen could benefit from the wit and wisdom of Charlie Munger.
Vale Charlie. If I was having one of those imaginary dinner parties where the most interesting people from history were around the table, you would be there.
Header photo: Charlie 5 days before his passing, holding forth in an interview with CNBC
Nov 22, 2023 | Change, Communication
Last week I was copied on an email one of my clients sent to a now former supplier.
It was polite, respectful, thanking them for their service, and wishing them well. What struck me immediately was that it was not in the ‘voice’ of my client. A moment later, I realised it had been generated by AI. There is nothing wrong with that, AI is a tool, like any tool, that enables leverage to be applied to your time and effort. There are many situations where that leverage is enormously valuable. Not using it to free up cognitive capacity to do something more valuable with your time would be dumb, even irresponsible.
However, writing has a crucial and increasingly unacknowledged role. The generation of wisdom and understanding.
I write a lot. There are almost 2,500 published blog posts on StrategyAudit, a bank of thoughts, ideas, opinions, responses, and a few rants about things I believe in. It is the product of 14 years of reflection, thinking, and understanding.
Writing for me is way more than just putting words on paper, or out into the ether. It is the way I explore, clarify, focus, and reason. It is an essential tool in my thought processes that build understanding. It is also the way those ideas are shared, inviting response, in whatever form it comes, building greater understanding in the process.
Over a commercial life of almost 50 years, I have accumulated a wealth of knowledge and experience, the latter often gained at the expense of some pain. Writing about all this has made it much more real, visceral, and readily available to those few I work with.
The machinations at OpenAI, the sudden firing of CEO Sam Altman, and conflagration that is still unfolding will be a tiny ripple in the exponential process of AI development. It will do little more than create some headlines, and the opportunity for commentators who have no inside knowledge at all to express an unfounded opinion. It seems the fight is, as usual, about money. OpenAI was founded as a nonprofit with a mission to ensure responsible deployment of the emerging AI technology. Potentially a fragile mission in todays world.
I worry that the world we are leaving our grandchildren (my kids are all making their own way now) is one where superficially attractive output camouflages a lack of real understanding of the drivers of those outcomes. To overcome this, we should encourage them to read, and write, a lot. Put down the devices and read books, real ones, with highlighter and pen in hand to emphasise the points of new understanding, and those that need further thought and investigation.
You cannot achieve that by skating over the surface, outsourcing your thinking. Using tools that cannot think is no substitute to doing the work yourself.
Nov 20, 2023 | Collaboration, Innovation
‘Great minds think alike’ is a common saying. Sometimes it might be right but the greater value of having a few great minds in the one place exchanging views is the fact that they will bring different ideas, values, backgrounds, and depth of knowledge to any discussion.
Throughout history those we remember as great have always had around them a group that has helped form and test their views.
‘The Inklings’ was a group of eminent writers meeting regularly at a pub in Oxford. They called it the ‘Bird and Baby,’ when the actual name was the ‘Eagle and Child.’ CS Lewis, and JRR Tolkien were amongst this group who through debate and constructive criticism tested, improved, and refined the thinking and writing of their comrades.
President Theodore Roosevelt had what he called his tennis cabinet. This was a group of younger men with whom he would go hunting, fishing, shooting, and climbing. All are the ‘masculine’ pursuits for which the President was famous. In the course of these adventures the conversations were all about the problems challenges and potential solutions facing the nation at that time. It was not an official cabinet, but probably held as much or more power than Roosevelts official cabinet, made up of men older than him.
Henry Ford was part of a small group made up of himself, Thomas Edison, President Warren Harding, and Harvey Firestone. This group of men who held in their hands a big chunk of the future path of America, went camping together into the mountains with a tent, a bottle, a few cans of beans, matches to light a fire, and a readiness to discuss the pressing issues of the day.
Even the great Einstein had a peer group, made up of Michele Besso, who was a college friend he called ‘the best sounding board in Europe, Marcel Grossman another college friend and mathematician with who he shared long walks around lake Geneva, and his first wife Mileva Maric, herself a substantial mathematician.
These days business ‘Networking’ groups proliferate, as owners of SME’s in particular, budding entrepreneurs, and solopreneurs look around for advice, input, sales leads, and often somebody to talk to who understands their situation. I am a member of several, and all are different, and I attend each for different reasons.
Where is your mastermind group?
Do you have one? Do you have in your own mind that dinner party where the six people you would most like to invite are, in your imagination, with you? While eating and drinking, you will be imagining a discussion where your ‘private’ group is responding to the things on your mind, offering you their views, ideas, and their perspective, on the issues you face and actions you are contemplating? Clearly in order to have such a powerful imaginary cabinet, you do need to have developed a clear understanding of each of your imaginary dinner guests in order to be able to reflect on your problems from their perspective.
Header photo is the Eagle and Child pub in Oxford, UK. Home of ‘The Inklings’ during the enlightenment.
Nov 17, 2023 | Customers, Innovation
Ideas are usually great because they do one of two things, sometimes both:
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- They focus on a deep and genuine need, obvious or not, to the casual observer.
- They remove a problem that causes irritation.
Great ideas have a common characteristic: they are focussed.
They do one thing exceptionally well. When you spread the impact, so they do more things less well, the utility of the original idea is diluted.
The ‘Penknife’ is a classic example. It evolved when writing was done with a gooses quill and ink. The quill required constant sharpening, so the small ‘penknife’ evolved. It folded, was small enough to be safely carried in a small pocket and did an admirable job of sharpening the quill.
As a kid, I had a penknife, it had a blade, corkscrew, a bottle opener, and something my dad told me was a tool for removing the stones from a horseshoe. Not all that useful for a kid living in Sydney in the 1960’s. One of my friends had a Swiss army knife that had a cutlery store contained in a body that was several times the size of my modest penknife. As a 10-year-old, I was envious of his Swiss army knife, and lusted after one until I recognised it did nothing well. It was also bulky, and the most used tool, the knife, was difficult to open.
So it is with many products, an innovative idea is ruined by added features that may be ‘sort of’ useful to a few, but just get in the way of the single function for which the tool was developed.
Ask yourself what is it that people are willing to pay for?
We needed that penknife; we do not need the horseshoe cleaner. There is a cost to adding it, which must be recovered in the price, but suddenly the knife is less useful for its primary purpose.
Sometimes, the feature laden penknife can hide the feature that if separated into a specific product might be extremely useful. My penknife had that corkscrew. It was not much value to me as a 10-year-old and did not work very well. My father had much better corkscrews that were designed for the job he wanted done and did it well.
Beware of feature-creep it might destroy your great idea.
Nov 15, 2023 | Collaboration, Leadership
As a kid I was a reasonable tennis player, having been coached by an expert and playing competitively from a relatively young age. Nothing outstanding, just competitive at a district level.
Aged about 16, my father who had been an outstanding player and myself started coaching on a Saturday morning on two local courts for a bit of pocket money. I discovered to my surprise, that breaking down, simplifying, and articulating to others the lessons I had absorbed from my coach, to enable me to communicate with those I was in turn coaching, made me a better player.
Recently in a (business) coaching session with one of my clients, we discussed for the 3rd or 4th time the concept of break even. How a break-even point is calculated, the discrimination between fixed and marginal costs, and the management value it delivers. The conversation started because it became evident that despite the previous conversations, my client did not understand sufficiently well to be able to implement in his business.
Therein lies the secret.
The discussion involved him explaining the concept of break-even back to me, while drawing a typical break-even diagram. It took prompting and discussion, but by the end it was clear he understood the meaning and value of calculating his break-even point.
The secret was him explaining it back to me, and demonstrating that he understood by drawing an illustration of how and why it worked. It required him to break down in his mind the elements of a break even into its simplest form. Then, explaining it back to me, as if I was someone who had absolutely no understanding of the idea. Drawing the diagram, enabled the understanding.
This simple act of writing down an explanation is the value that writing this blog delivers to me. I often start a blog with an interesting idea which requires research and building of understanding before writing it down in its simplest possible form. Through that process, understanding builds.
If you cannot explain something in a way that a 10 year-old can understand, you probably do not understand it well enough yourself. The greatest exponent of this technique of using illustrative metaphors to explain complexity in simple ways was Albert Einstein.
